The Federal Reserve System (Wikipedia)

Criticisms of the Federal Reserve System according to Wikipedia:

A large and varied group of criticisms has been directed against the Federal Reserve System. One critique, typified by the heterodox Austrian School, is that the Federal Reserve is an unnecessary and counterproductive interference in the economy.

According to this theory, interest rates should be naturally low during times of excessive consumer saving (because lendable money is abundant) and naturally high when high net volumes of consumer credit are extended (because lendable money is scarce). These critics argue that setting a baseline lending rate amounts to centralized economic planning; a hallmark of socialist and communist societies; and inflating the currency amounts to a regressive, incremental redistribution of wealth.

Some critics state that the Federal Reserve System is unconstitutional because Congress is empowered by the Constitution to coin money, and is not empowered to print money. Congressman Ron Paul, for example, argues that:

"The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy."

Others state that the Federal Reserve System supports fractional-reserve banking, which they claim resembles an unsustainable pyramid scheme. According to the Austrian Business Cycle Theory, a fiat money system is unsustainable, because the money supply must expand exponentially in order for all loans to be payed back with interest. Because of the limit in the earth's resources, expansion has a limit, and the expansion and collapse of the money supply occurs in cycles. This theory is dismissed among mainstream economists and contradicts some evidence from mainstream economic studies about business cycles.

Critics also argue that the Fed lacks accountability and transparency, and that there is a culture of secrecy within the Reserve. In addition, the Fed sponsors much of the monetary economics research in the US. Some believe this makes it less likely for researchers to publish findings challenging the status quo that is the Federal Reserve. The Federal Reserve Board Abolition Act is a proposed remedy to these issues.


Historical Criticisms:

Criticisms of the Federal Reserve System are not new, and some historical criticisms reflect current concerns.

At one end of the spectrum are economic thinkers, such as those of the Chicago School or the Austrian School, who want the Federal Reserve System abolished. They criticize the Federal Reserve System’s expansionary monetary policy in the 1920s, arguing that the policy allowed misallocations of capital resources and supported a massive stock price bubble.


Excessive New York City influence:

Historically in the United States, many people have complained that people in New York City have too strong of an influence on banking in the United States. This has been researched in a working paper written for the Federal Reserve Bank of Atlanta in 2003. The abstract for this working paper says:

In our previous research we have detected that New York City banking entities usually exert substantial influence on legislation, greater than their large proportion of United States’ banking resources. The authors describe how this influence affected the success or failure of central banking movements in the United States, and the authors use this evidence to support their arguments regarding the influence of New York City bankers on the legislative efforts that culminated in the creation of the Federal Reserve System. The paper argues that successful central banking movements in the United States owed much to the influence of New York City banking interests.


Handling of The Great Depression:

Milton Friedman (1912-2006), a prominent figure within the Chicago School, argued that the Federal Reserve System made the Great Depression worse by contracting the money supply at the very moment that markets needed liquidity. Since its entire existence was predicated on its mission to prevent events like the Great Depression, it had failed in what the 1913 bill had tried to achieve. In an interview with Peter Jaworski (The Journal, Queen's University, March 15, 2002—Issue 37, Volume 129) Friedman said that ideally he would "prefer to abolish the federal reserve system altogether" rather than try to reform it, because it was a flawed system in the first place. He also said he would like to "abolish the Federal Reserve and replace it with a computer," meaning that it would be a mechanical system that would keep the quantity of money going up at a steady rate and that "leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement."

Benjamin Strong, the chairman of the Federal Reserve during the Great Depression, said that the American authorities would reduce discount rates as “un petit coup de whisky for the stock exchange.”

Ben Bernanke agreed that the Fed had made the Great Depression worse, saying in a 2002 speech:

I would like to say to Milton [Friedman] and Anna [J. Schwartz]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

While the heterodox economic thinker, Murray Rothbard of the Austrian school, disagreed on the true origin of causality, he did agree that the Federal Reserve aggravated the Great Depression.


Inflation:

One major area of criticism focuses on the failure of the Federal Reserve System to stop inflation; this is seen as a failure of the Fed's legislatively mandated duty to maintain stable prices. These critics focus particularly on inflation's effects on wages, since workers are hurt if their wages do not keep up with inflation. They point out that wages, as adjusted for inflation, or real wages, have sometimes gone down (such as at the end of 2004).

Milton Friedman alleged that the Fed caused the high inflation of the 1970s. When asked about the greatest economic problem of the day, he said the most pressing was how to get rid of the Federal Reserve.

United States Congressman Ron Paul, ranking member of the Subcommittee on Domestic and International Monetary Policy (of the House Banking Committee), has also criticized Federal Reserve policy for creating and downplaying excessive inflation.

Ralph Nader, a consumer activist and presidential candidate in several elections, has criticized the inflation policies of the Federal Reserve for, he says, ignoring excessive inflation in stock prices and corporate welfare disbursements while showing consistent concern over any rise in ordinary people's wages.


Money issuing power:

United States Congressman Dennis Kucinich, at the 2005 Monetary Reform Conference, raised the question of why the Federal Reserve should have the power to issue the United States' currency. Kucinich has also questioned the idea that the Federal Reserve should be independent. He suggested that it should be "accountable" instead.


Private Ownership:

Section 5 of the Federal Reserve Act of 1913 states that the Federal Reserve Banks are owned, through stock issuance, by private member banks. The issue of private ownership has been one of controversy for numerous reasons.

Dennis Kucinich, addressing Congress during the January 2009 session stated, "The Federal Reserve is no more federal than Federal Express... If we could take that (money-issuing) power back and place the Federal Reserve under Treasury, we start to be in a position of being able to control monetary policy on behalf of the United States people."

One of the first criticisms of the private Federal Reserve system was Charles August Lindbergh who criticized the problem of private banks working against the best interests of the citizens: "The financial system has been turned over to the Federal Reserve Board. That Board administers the finance system by authority of a purely profiteering group. The system is Private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money."


Opacity:

Some argue that the Federal Reserve System is shrouded in excessive secrecy. Meetings of some components of the Fed are held behind closed doors, and the transcripts are released five years after the meeting was held. Even expert policy analysts are unsure about the logic behind Fed decisions. Critics argue that such opacity leads to greater market volatility, because the markets must guess, often with only limited information, about how the Fed is likely to change policy in the future. The jargon-laden fence-sitting opaque style of Fed communication, especially under the previous Fed Chairman Alan Greenspan, has often been called "Fed speak." The Fed has also been known to be standoffish in its relations with the media in an effort to maintain its carefully crafted image and resents any public information that runs contrary to this.

Some critics argue that the lag in the release of FOMC transcripts, and the limited and carefully worded minutes and statements lead to public unawareness of the issues of major concern to the Fed, and leave the public with an inadequate understanding of the logic and rationale behind the decisions.[citation needed] Some argue that this is a concerted attempt to keep Congress and the public at arm’s length, and that the Fed did not help this public attitude with their prior actions--transcripts of meetings were not released until 1994. Before that time, the Fed refused to give transcripts out on requests, even under the Freedom of Information Act (FOIA). When a judge ordered the transcripts released in the 1970s, the Fed said they had stopped taking transcripts at all. In 1993, Rep. Henry B. Gonzalez confirmed that the Fed did have tapes and transcripts of the meetings and could have complied with the FOIA requests, but had misrepresented the existence of the transcripts and chosen to ignore questions from Congress. After the existence of the transcripts was revealed, the Fed agreed to release the transcripts on a five-year time lag. The time period has been extended, so that for example 1992's transcripts were not released until 1998.

Some critics believe the Fed exacerbated this idea when it decided to stop publishing the M3 aggregate of financial data, which details the total amount of money in circulation at a time. Some of them argue that it is a way the Fed could hide an impending economic disaster from the public if it felt the need. The Fed said that economists did not need M3 when they had M2, despite the fact that the M3 was the only aggregate to contain information regarding the most extravagant monetary exchanges, and therefore would be needed to have a complete understanding of the overall monetary policy in the United States.

On November 7, 2008, Bloomberg News requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit seeking to force disclosure. The Federal Reserve response to this request was reported by Bloomberg News:

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.


Congress:

Congressman Louis T. McFadden, Chairman of the House Committee on Banking and Currency from 1920–31, accused the Federal Reserve of deliberately causing the Great Depression. In several speeches made shortly after he lost the chairmanship of the committee, McFadden claimed that the Federal Reserve was run by Wall Street banks and their affiliated European banking houses. On June 10, 1932, McFadden said:

Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. The Federal Reserve Board, a Government board, has cheated the Government of the United States and the people of the United States out of enough money to pay the national debt. These twelve private credit monopolies were deceitfully and disloyally foisted upon this country by the bankers who came here from Europe and repaid us for our hospitality by undermining our American institutions... The people have a valid claim against the Federal Reserve Board and the Federal Reserve banks.

In 1933, he introduced House Resolution No. 158, Articles of impeachment for the Secretary of the Treasury, two assistant Secretaries of the Treasury, the Board of Governors of the Federal Reserve, and the officers and directors of its twelve regional banks. There were two attempts on McFadden's life, a failed shooting and an apparent poisoning that made him "violently ill" after attending a political banquet in Washington. In 1936, McFadden attended a banquet in New York, and died shortly after, what could possibly be a third and successful attempt of assassination.

Quite a few Congressmen who have been involved in the House and Senate Banking and Currency Committees have been open critics of the Federal Reserve, including Chairmen Wright Patman, Henry Reuss, and Henry B. Gonzalez. Currently, Congressman Ron Paul is the ranking member of the Monetary Policy Subcommittee and he is a staunch opponent of the Federal Reserve System. During each Congress Paul introduces a bill to abolish the Federal Reserve System (H.R. 2755—110th Congress, H.R. 2778—108th Congress, H.R. 5356—107th Congress, H.R. 1148—106th Congress), although he has yet to have any hearings held on his legislation or to gather any cosponsors. It has often been said that the Federal Reserve is a creature of Congress and it is the fluctuating opinion of that body that it answers to.

http://en.wikipedia.org/wiki/Federal_Reserve